Why Isn't Inheritance Tax 100%?

You could argue inheritance tax (IHT) is the fairest tax of the lot, because the people who pay don’t need it any more. So why is it the most controversial tax of all – and why are people so against paying it?

In theory, IHT is fair because, technically speaking, it is the only tax that penalises the dead and not the living.

Compare it to stamp duty on property transactions, where walking, talking, breathing individuals must stump up a massive sum right at the moment they are making the biggest investment of all: a place to live.

In London and the South East of England, where property values are bent out of all proportion, a semi-detached home in a reasonable area (we’re not talking Chelsea here) big enough for a family of four can easily cost £800,000.

People aiming this high will have to fork out £40,000 in stamp duty alone at the point of sale, on top of all the transaction fees, legal arrangements and estate agent percentages.

Compared to that, IHT, which takes 40 per cent of the value of an inheritance above a generous threshold of several hundreds of thousands of pounds, seems pretty reasonable.

So why not make it 100 per cent? By all means keep the tax-free threshold, but otherwise let’s take money from the deceased and use it to supplement taxes paid by the living.

IHT in its currently form makes a tiny income for the government (Photo credit: altogetherfool)

Such a measure could have many side-benefits. For one thing, conscientious parents won’t feel under pressure to depart the mortal realm so that their kids can have the money they need to get on in life.

It would also, presumably, provide an enormous boost to retail sales. If you can’t take it with you and you can’t pass it on, then heck, why not spend it all? The yacht and fast car industry would balloon over-night.

Charities would likely benefit to the tune of tens of millions every year and, yes, accountancy firms and lawyers would experience massive leaps in billings as wealthy people on their last legs hurried to avoid paying the tax.

While ramping up IHT would give a boost to business, pure maths says it would contribute a bit to public finances too.

Despite a clampdown on families contesting inheritance tax payments, the government clawed in just £3.1 billion via the tax year 2012-13. To put that figure in perspective, income tax receipts were £22 billion in January 2014 alone.

In the same tax year that IHT totalled £3.1 billion, income tax contributed more than £152 billion, national insurance and VAT each added more than £100 billion and the total annual tax take was just shy of £470 billion.

Ramping up the tax would surely give the indebted HMRC a little bit of wriggle room, wouldn’t it?

The Tory government’s action on inheritance tax has been mixed. On one hand it very rarely increases the tax-free threshold and has taken a tougher stance than its predecessor, meaning the tax take (and presumably the grumbly recipient rate) went up 23 per cent last year alone.

Why does he feel under pressure to do this? Is it just a bid for voter kudos (inheritance tax has been abolished in places like Australia, Israel and New Zealand already – a move that has been fantastically popular), or are there sound economic principles at play?

Have a million quid on Dave (Photo credit: Wikipedia)

Proponents of the Laffer Curve will tell you that putting up taxes, at least beyond a certain rate, actually has a deflationary impact on tax receipts coming in. And it seems the experts agree that IHT is already about as high as it could go without causing a diminished return for the Treasury.

“Where an approach is perceived to be unfair people will make emotional and not financial decisions, and a tax of more than 50 per cent on assets at death would, we believe, be perceived as punitive and unfair,” says Kevin Hughes senior partner at Westminster Wealth Management.

“At this point people would actively avoid this tax, both legally and illegally. The most brilliant minds would be employed finding loopholes and mechanisms to avoid the tax. The wealthy would leave the UK with their assets, or place assets safely in trust outside the UK.

“At present, although IHT is foreseeable and offers plenty of perfectly allowable planning opportunities to pass assets to heirs in advance, many either simply do not plan, or pay to insure against its effects.

“In our view it is not a situation that would persist if any part of the IHT tax bandings went above the psychological 50 per cent barrier. For these reasons, if such a change was implemented, we would expect the tax take to fall in total.”

Penny Clarke, a lecturer at Manchester Business School, says IHT is unpopular because it is a “very personal tax” on money passed through generations of families. But the numbers of a very high IHT rate don’t stack up either, she says.

“Inheritance tax receipts are forecast to be £3.3billion this year. That’s just over half a percent of all tax revenues the Treasury receives. Using a rough and ready calculation, in order to decrease the rate of income tax by just 1 per cent, the government would need to raise a further £10 billion from IHT, which is challenging, to say the least.

“Furthermore, taxes will have been paid to varying degrees on the assets within the inheritance tax estate already. Repeatedly taxing that which has already been taxed, doesn’t seem fair to whole swathes of the population.”

Bang goes the theory.

Possibly the best rebuttal to ‘super IHT’ was made by my own mother when I suggested that inheritance tax could be raised. The problem is, she said, “people work for their children”. As a parent it’s one argument that’s impossible to resist.

I'm a London-based freelance business journalist writing for the UK broadsheet press. I'm also the author of 'The New Rules of Business', a book revealing the secrets of a range of entrepreneurs, and founder of the news website Minutehack.com.